Why President Trump's 'Very Big And Exciting' Trade Deal Is Not In The UK's Best Interests

'Working on a major trade deal with the United Kingdom', tweeted President Trump today. 'Could be very big and exciting. JOBS!' he crowed.

The UK can’t agree to a trade deal until it formally leaves the European Union in March 2019. But it can participate in preliminary negotiations. The UK’s Secretary of State for International Trade, Dr. Liam Fox, is currently in Washington for preliminary talks to establish the framework for such a trade deal between the UK and the US.

United Kingdom Secretary of State for International Trade Liam Fox delivering remarks on 'The Future of UK Trade Policy' at the American Enterprise Institute (AEI) in Washington, DC, on July 24, 2017. PAUL J. RICHARDS/AFP/Getty Images

On the face of it, this does indeed look good for both the UK and the US. Among single countries, US is already the UK’s largest export partner and second-largest import partner – only Germany exports more to the UK. This is despite the fact that the UK is currently part of the EU, which has no trade deal with the US and therefore trades with it under World Trade Organization (WTO) rules. The UK is likely to 'grandfather' existing EU WTO schedule tariffs when it leaves the EU, which would mean no immediate change to existing trading relationships. But if these could quickly be superseded by a trade deal that reduced tariffs on both sides, and perhaps also dropped regulatory barriers, there could be a considerable boost to mutual trade. What’s not to like?

From the UK’s perspective, there is a lot to like. Even though the US is already the top destination country for its exports, it needs to boost its trade with the US. After it leaves the EU, the UK will face the EU’s high external tariff on its exports to EU countries, unless by some miracle it has managed to agree a trade deal with the EU by that time. It will also potentially face creeping regulatory barriers to trade, as UK and EU regulation will diverge over time. Leaving the EU’s single market – and probably the customs union too – will therefore inevitably diminish trade with EU countries. Brexiteers like Dr. Fox hope that new trade deals with partners outside the EU will compensate for the loss of trade with the EU. The US is the largest and richest of the UK’s external partners, and arguably the softest target for a trade deal, because of the existing strong links.

But it is less clear why the US is so interested in an early trade deal with the UK. On the face of it, there is no reason for the UK, with its 68m population, to be higher up the negotiation list than the 500m strong EU. Germany’s imports from the US are a similar value to the UK’s imports, and of course it exports far more to the US. The Trump administration may huff and puff about Germany’s trade surplus, but the fact remains that Germany is as important a trade partner for the US as the UK, and there are another 26 countries in the EU as well.

Nor does a look at the UK’s trading relationship with the US shed any light. Until 2015, the UK ran a persistent trade surplus with the US. A trade deal skewed towards US interests would help to eliminate this. But in the last 18 months, the UK’s trade balance with the US has switched from surplus to deficit, mostly because of a fall in British exports to the US. This has happened despite a substantial drop in the British pound’s exchange rate versus the US dollar during 2016. At 1.30 dollars to the pound today, sterling remains over 20 cents below where it was in January 2016. Conversely, US exports to the UK seem to be holding up well despite the unhelpful level of sterling, though given the growing weakness of the UK economy, this might not continue for much longer.

In contrast, not just Germany but the entire EU is running a substantial trade surplus with the US, which the economic hawks in Trump’s administration would be anxious to eliminate. So why the focus on the UK, rather than the EU?